If you are plagued with multiple debts, you know how difficult it is to repay the borrowed money to your creditors. You have vehicle loans, home mortgage, and credit card debt. And you would like to pay off these loans fast without losing your assets. Your car debt is still due, a considerable amount. Then, you are scouting for a consolidated loan so that you can combine all your debts into a single payment account. Your current debts are irking you, as you need to shell out a high-interest rate. It has ripped you off financially for the last few months. Again, you are worried about your multiple credit card bills. You notice hidden charges, exorbitant late fee penalty, and service charges.
According to an article published on https://www.huffpost.com the idea of consolidation is not bad. You can roll all your small and big debts into one system and start repaying. It improves your finances, makes payment management easy, and you can get a low rate of interest. Then, it does not work the same way and in your favor, if you commit some mistakes.
You should clean your finances even before you apply for consolidation. What does that mean? First, stop using your high-interest credit cards. Adhere to a budget. It will stop you from spending extravagantly or making unwanted purchases. You can create an emergency fund to save money every month. Think about how much you can save in a year!
Coming back to debt consolidation, you should not opt for the same sans any planning and forethought. Rushing into things will make you commit some mistakes. Here are four mistakes to avoid when consolidating your current debts:
1. Not Taking Your Credit Rating Seriously
When you have a poor credit rating when you took out the original loan, ignoring the score will affect your ability to apply for a consolidated loan in the future. Therefore, pay heed to your credit score and check your credit report regularly. If you have not gone through the document since the time you applied for your loans, it will affect you in the long-term.
Studies indicate that you will need at least a credit rating of 620-640 to become eligible for a consolidated loan. Therefore, make a serious effort to improve your score. It will help you to qualify for low-interest debt consolidation. It is one of the greatest benefits if you are running short of funds.
Then, when you pay no heed to your credit score even when it is below 620, you cannot expect a consolidated loan. The possibilities are bleak because lenders will not trust you with the monthly payments. It will be tough for you to persuade them for a consolidated loan. The only solution is regularizing your payments and improving your credit rating in the process.
Fret not. Take your time and wait for your score to soar. Once you make regular payments, your score will start increasing. Until that time, do not apply for debt consolidation. You will face rejection. Therefore, what is the point? If you have an average credit rating, wait for some time until it shoots up. There is no point in paying a loan application fee and then face rejection due to a poor score. Learn more about consolidation tips and tricks on websites like NationaldebtRelief.com or similar platforms.
2. Stay Away From A Secured Loan
If you require a huge amount as a consolidated loan, the only solution is a secured loan that attaches your home or vehicle. Avoid this mistake at all cost. When you have financial constraints for a year or so, maybe your partner loses employment or someone in your family has a medical condition, there are techniques to manage the situation with unsecured debts. You can opt for an unsecured loan. Do not go for secured loans because you may end up losing your home and other property in the process in case of a default.
Again, if you need to claim benefits for a certain time, you will get assistance with your mortgage interest after a couple of months. Then, you will not receive any help when it comes to secured loan payments. Avoid taking a secured loan from a sub-prime lender with a variable rate. These lenders will rip you off financially, as they keep increasing the variable rate even when other rates are the same.
The FCA that controls lenders cited that companies offering secured loans are lending too much with appropriate checking and investigating. So if you default, your home and property are at risk.
3. Avoid Consolidating Small Debts
It does not make sense to consolidate a small-value debt that you have the ability to repay. It is not worth it. Again, if you have a huge loan but you have only two months more to close it, after which you become debt-free, do not include the same in your consolidation plan. Refinancing the same will make you pay for a longer period, more than two months.
You can use one of your credit cards once for this type of small-value loan. You can opt for a zero-percent balance transfer. It is all about using your common sense when it comes to debt consolidation. Therefore, think and then decide.
4. Not Shopping Around For Interest Rates
Agreeing to any rate of interest is your greatest mistake when opting for debt consolidation. Take some time off your busy schedule and look up websites and online lenders that offer competitive rates of interest. Opt for the company that provides a reduced rate of interest. Make sure that you have a good credit score if you want a reasonable interest rate.
You can do some research on banks and credit unions too. Figure out what annual percentage rate they are offering to borrowers. Ask questions about the rates of interest when you zero in on a lender.
You need to become a smart borrower when it comes to debt consolidation. Use the right option to get a low-interest loan. Avoid these mistakes and you will be in a win-win situation.
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